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Onions could drive inflation near 6% in last two months of 2024: Economists

Rising onion prices are unlikely to have a significant impact on inflation in October but may lead to inflation rising to near 6% levels in coming months, said economists.

Onion prices rose nearly 75% in the first week of November compared with the previous month.

“Alongside a rise in broader vegetable prices in October, we expect CPI inflation to rise to 5.3% y-o-y from 5.0% in September, with headline inflation tracking 6% in November/December, before moderating next year,” said Sonal Varma and Aurodeep Nandi, economist, Nomura.

While economists contend that falling tomato prices are expected to keep inflation in check in October, they say the situation may worsen going ahead.

“Daily food prices from the National Horticulture Board is indicating a 10.9% MoM rise in onion prices in October, which is being countered by a 9.3% decline in tomato prices. Potato prices are also showing a mild decline in October. Overall vegetable prices, on a CPI-weighted basis, are showing a mild positive increase on a month-on-month basis,” said Gaura Sengupta, economist, IDFC First Bank.

Onions have a 0.64% weight in the retail inflation basket, whereas tomatoes have a lower 0.57% weight in the inflation basket.

“Retail prices are up by 30-40% y-o-y basis, so the impact can be around 0.19-0.24% in October,” said Madan Sabnavis, chief economist, Bank of Baroda.

However, economists contend that a repeat of the July-August period, when inflation rose beyond the Reserve Bank of India’s upper band target of 6%, is not possible.

“The pick-up in onion prices is due to uneven monsoon distribution, which has impacted arrivals in September and October. But the disruption in supply isn’t as steep as it was in the case of tomatoes. Seasonally, onion prices tend to rise in October and November and then decline in December or January,” Sengupta said.

The government has a buffer stock of 500,000 tonnes. Till October 28, the government had offloaded 170,000 tonnes.

“The government has swung into action, announcing export duties on onions, minimum export prices and offloading buffer stocks, although prices are yet to cool,” said Nomura economists.

Despite falling prices, food inflation averaged 6.6% in September; a stress in onion prices is expected to keep food prices high.

The government will release October inflation data on November 13.

Nov 07,2023

Source: Economics Times